Is it About the Entry or The Exit?

If I do a Google search for stock trading entries I get over 5 million results. If I change the search to stock trading exit strategies results in 680,000 results. I could change the search terms around a bit and either increase or decrease the amount of results.  My point though is when it comes to how to enter or how to exit there are just so many choices.

It really depends upon who you are, what you are trying to accomplish, and what is your time frame of reference. Instead of fretting over how to enter, why not concentrate on the risk.  Is the risk too much? Or perhaps not enough?

Revisiting Friday’s trading notes part IV Strategy, and taking the first example: (YRCW) YRC Worldwide Inc Let’s do some figuring, assuming of course that you like the idea:

YRCW

As I write this (Friday) the stock is trading at $22.45.  There is a breakout point shown by the upper horizontal line at $24. The chandelier exit is at $21.12 (on a close basis) so let’s figure our choices here on entry and exit:

Screen Shot 2014-04-04 at 10.03.40 AM

Waiting for the breakout costs us $1.60 per share assuming an execution of $24.05. Now let me extrapolate a bit. Suppose you have a $25,000 portfolio and $5,000 of your portfolio can be committed to this trade (20%). Your maximum acceptable portfolio loss is 3% that would be $750 ($25,000 times 3%). Please change the numbers to fit you!

Position size= Purchase Price/$ Risk.  In the first example buy at $22.45 we can buy 564 shares, waiting for the breakout 256 shares (these are rounded to the nearest whole number). This should make sense as waiting for the breakout almost doubles the dollar risk. So to keep the portfolio risk constant we reduce the position size.

Screen Shot 2014-04-04 at 10.29.43 AM

Regardless of which way we handle this the risk is exactly the same in both dollar and percentage terms. In the first example a purchase of 564 shares for $12,661.80, This however, is almost 50% of our portfolio not a  20% allotment. That is if you’re allocating capital in that manner. If you wished to reduce the position size so it occupied about 20% then both position sizes will be close. The loss to the portfolio however, would be half.

Screen Shot 2014-04-04 at 10.40.55 AM
By sticking with a percent of the portfolio committed strategy we reduce the potential loss even further (percentage of total).

Now that we’ve taken care of the risk aspects, remember this, regardless of which way you decide to analyze, the one that is purchased now, will show higher gain if the stock moves higher. Of course this could offer a second strategy! Buy half now and half at breakout.

I’m not going to go over the numbers but you should; what happens if I do half here and half on the breakout? What happens to the risk? What happens to the potential? Food for Thought  🙄



Talking Points and The App That Keeps You Out of Your Doctor’s Office:

How Not to Do It (Robert Seawright)

How NYSE, Nasdaq profit off ‘Flash Boys’ (NY Post)

The market suddenly hates tech stocks and no one knows why (Quartz)

Why economists should try to measure happiness (The Week)

The Woman Behind Apple’s First Icons (Priceonomics)

Facebook Collapse Will Continue (24/7 Wall)

An agenda for the IMF (Larry Summers)

Lies, Damed Lies, and GDP (Bob McTeer)

Supporters Pushing Harder For New California Oil Tax (IBD)

Wolff: The world according to Amazon (USA Today)

It IS about the risk premium! (Humble Student)

Dow Theory Signal Questions Bullish Economic And Market Trends (Short Takes)

So You Think You’re Smarter Than A CIA Agent (NPR)

Markets Are Rigged, Just Not How You Think (Servo)

The Daily Routines of Geniuses (HBR)

Stop adding up the wealth of the poor (Reuters)

How Zipcar’s founders built and lost a car-sharing empire (The Verge)

That screeching sound is the market losing momentum (MarketWatch)

Millennials and Sex: A New Take on Dating, Marriage and Monogamy (Rolling Stone)

The App That Keeps You Out of Your Doctor’s Office

have a great day!